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FIN 428
Commerical Bank Management Test 1
86
Finance
Undergraduate 4
09/30/2012

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Term
Risk
Definition
the probability that an event will occur that will harm a bank
Term
Opportunity
Definition
the probability that an event will occur that will benefit a bank
Term

Risk management is particularly important for banks because they are

Definition
highly leverage
Term
Management
Definition
the act of organizing, leading, directing, and controlling resources available to an organization that accomplishes its goals.
Term
Financial System
Definition

consists of a central bank, collection of markets and institutions, rules of conduct among them, and supervisory authorities.

Term
The Federal Reserve System
Definition

Has responsibility for monetary policy, bank supervision, financial system liquidity, payment system matters

Term
Financial Market
Definition
is where financial assets (securities) such as stocks and bonds can be bought or sold.
Term
Money marketsecurities
Definition

debt securities with a maturity of one year or less (e.g., T-bills, commercial paper, negotiable CD )

Term
Capital market securities
Definition

securities with a maturity or life greater than one year (e.g., bonds, mortgages, mortgage backed securities, stocks)

Term
Derivative securities
Definition
securities that derive their value from an underlying asset (e.g., futures, forwards, options)
Term
Markets
Definition

provide a low cost way to raise capital, diversify risk, and increase investor liquidity.

Term
Banks
Definition

 corporations that are the primary source of business credit, important source of consumer loan and deposit services,  and principle operators of the payment system.

Term
Savings and loans
Definition

mutual organizations or corporations that provide deposit services, mortgage, consumer and business credit.

Term
Credit unions
Definition

mutual organizations that provide deposit services and consumer credit to those specified in their field of membership.

Term
Insurance Companies
Definition

mutual organizations or corporations that provide businesses and individuals life, health, property protection from unexpected events.

Term
Broker/dealers
Definition
 partnerships or corporations that buy/sell securities on behalf of others (agents) and for themselves (principals), underwrite and sell new equity and debt issues.
Term
Pension funds
Definition

any fund, plan, or scheme that provides retirement income.

Term
Mutual funds 
Definition
trust or corporation that consists of a pool of funds collected from  investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets.
Term
Finance companies
Definition

corporations that provide consumer and short-term business credit.

Term
Government Sponsored Enterprises (GSEs)
Definition

corporations created by the U.S. government to fund such things as homes, education, agricultural production (e.g., FANNIE MAE, Salle Mae, FarmerMac)

Term

Responsibilities of financial system participants

Definition
Disclosures, Payment forms, Delivery terms – what, when, Contract enforcement -- default
Term

Number of banks _______ by more than half since 1980

Definition
Declined
Term
At the same time the number of branches offices has______by more than 60 percent.
Definition
Increased
Term
 “separation of banking and commerce.” 
Definition
A fourth feature of the U.S. banking system
Term
Bank Holding Company
Definition
From a public policy perspective, they help maintain separation of banking and commerce.  From a banker’s perspective, they provide a way to be a more effective competitor.
Term
Bank Holding Company
Definition
Provide financial strength to their bank subsidaries
Term
Bank Holding Companies
Definition

serve as tax shelters and financing vehicles for ownership changes of community banks.

Term
A Bank Holding Company is
Definition
An entity that owns or control 25 percent of any class of voting stock of a bank or has a majority of its directors in common with a bank is a bank holding company.
Term
bank holding companies can elect to be
Definition
financial holding companies.
Term
Financial holding companies were created by the
Definition
Gramm-Leach-Bliley Act of 1999
Term
Financial Holding Companies can
Definition
insurance underwriting,
securities dealing and underwriting,
financial and investment advisory services,
merchant banking*,
issuing or selling securitized interests in bank-eligible assets, and  for the most part,
any non-banking activity authorized by the Bank Holding Company Act.
Term

_____ banks are more likely to follow a transactions (high frequency, standardized, automated) banking approach while ______ banks tend to favor a relationship (close customer contact, non-standardized, cross-marketing) model that adds customer value.

Definition
Large, Small
Term

A ______ banking organization will offer a wider array of products and services and fund its operations over a large geographic area or the world.

Definition
Large
Term

Primary focus of _______ banks is making loans and gathering deposits in the local community

Definition
Small
Term
Traditional banks
Definition
general banking business bank
Term
Credit card banks 
Definition
 credit card operations, limited deposit powers, limited lending authority
Term
Trust bank
Definition
engage in fiduciary activities
Term
Bankers’ banks
Definition
provides banking service to other banks and their employees
Term
Minority banks
Definition
serve socially and economically disadvantaged individuals
Term
Community development banks
Definition
serve low-to-moderate-income individuals or communities or other areas targeted for redevelopment
Term
Edge Act and Agreement Corporations
Definition
provide international banking services
Term
Industrial banks
Definition
make small consumer and business loans
Term
Foreign branches and agencies
Definition
make short-term and long-term loans, accept deposits
Term
International banking facilities
Definition
owned by other banking types to help them compete for foreign loans and deposits.
Term
Bank Supervision
Definition
is the monitoring of banks in order to determine if they are being operated safely and soundly and are in compliance with laws, rules, and regulations. 
Term
Bank Supervision Activities
Definition
Offsite monitoring of periodic financial reports
Bank examinations and bank holding company inspections
Supervisory actions
Processing charter and branch applications, bank mergers/acquisition, and change in control notifications
Term
Reasons why we have Bank Supervision
Definition
Protection of the safety of the public’s savings
Ensure equal opportunity and fairness in credit access and to insure appropriate customer disclosures
Avoid concentration of power
Promote public confidence in the financial system
Term
Bank supervisory agencies
Definition

Comptroller of the Currency (OCC)

Federal Deposit Insurance Corporation (FDIC)
Federal Reserve System
State Banking Boards or Commissions
Term
Other supervisory agencies
Definition

Department of Justice (anti-trust)

Securities and Exchange Commission (financial reporting/disclosures, securities regulation)
U.S. Treasury (anti-money laundering, anti-terrorism)
Term

OCC, A bureau within the Department of Treasury

Definition
Oldest of the federal banking supervisors, established by the National Bank Acts, 1863,1864.
Charters national banks
Primary supervisor for national banks
Term

United States Consumer Financial Protection Bureau

Definition
Created by Dodd-Frank Wall Act of 2010
Examines and enforces consumer regulations for larger banks, those with assets over $10 billion.
Term

Federal Financial Institutions Examination Council

Definition

Formal interagency body that prescribes uniform principles, standards, and report forms for the federal examination of financial institutions.  Work to promotes uniformity with state banking supervisors as well.

Term

State banking department or commissions

Definition
Charter state banks, Supervisor of state banks
Term
The Report of Condition and Income is often referred to as the
Definition
 “Call” report. 
Term

Generally examinations and inspections …

Definition
are a forward looking assessment of risk management and financial factors.
Term
Formal Supervisory Actions
Definition
The agencies use these actions to address unsafe, unsound practices, and violation of laws. Ex.Insurance Termination and Consent Orders
Term
Informal Supervisory Actions
Definition
These agencies use these actions on fundamentally sound institutions but want written committments from the board of directors to address identified issues. Ex. Memorandum of Understanding
Term
Ultimate outcine if poor management
Definition
Failure
Term
The banking agencies under the 1960 Bank Merger Act and its 1966 amendment review and approve
Definition
bank acquisitions and mergers
Term

These types of transactions are referred to as _________ or “market extension” mergers or acquisitions.

Definition

Horizontal

Term
Credit risk
Definition
The risk that a bank won’t receive the principal and interest it is owed.
Term
Liquidity risk
Definition
The risk that a bank won’t be able to meet its cash needs in a timely manner and at a reasonable cost
Term
Market risk
Definition
The risk that a bank’s earnings and capital might be adversely affected by changes in interest rates, exchange rates or securities prices
Term
Operational risk
Definition
The risk that unanticipated internal or external events such as equipment breakdowns, “acts of God,” customer and employee fraud and undetected software errors will harm the bank
Term
Legal risk
Definition
The risk that unenforceable contracts, lawsuits, or adverse judgments will harm the bank
Term
Reputational risk
Definition
The risk that negative publicity will harm a bank’s public image.
Term
Stockholders
Definition
focus on return on equity or net income/equity capital, the return they receive on their investment
Term
Bank supervisors
Definition
focus on return on assets or net income/assets, a bank’s effectiveness and efficiency in generating operating results
Term
Level
Definition
tells you where you are; use it to judge adequacy.
Term
Trend
Definition
tells you direction, use it to see where the bank may be going
Term
Balance sheet identity
Definition
Assets= Liabilities plus Capital
Term
Accounting jargon
Definition
debit an asset to increase it; credit an asset to decrease it; reverse for a liability – debit to decrease, credit to increase.
Term
Values
Definition
are “as of” end of calendar quarters
Term
Assets
Definition
are listed according to there convertibility to cash, liabilities by how soon they are due
Term
Risk taking by a bank shows up on the balance sheet
Definition
assets and liabilities) – maturity structure, receipt and payment frequency, liquidity, market risk sensitivity, credit quality
Term
Cash and Deposits Due from Bank
Definition
Vault cash
Deposits with other banks (e.g., correspondent deposits)
Cash items in process of collection
Reserve account with the federal reserve
Term
Sometimes cash items are called
Definition
primary reserves
Term
Reverse repurchase agreements
Definition
– bank takes temporary title to securities owned by borrower (securities basically serve as collateral for a loan to the borrower)
Term
Divided into two accounts
Definition
held to maturity” and “available for sale”
Term
Loan and leases
Definition
Usually the largest asset on balance sheet
Gross loans and leases – Sum of all loans and leases
Term
Off-balance-sheet transactions
Definition
expose a firm to counterparty risks (credit risk) and liquidity risk
Term
Window Dressing
Definition
moving items off balance sheet, delaying payments, recording unearned revenues
Term
Auditing Financial Statements
Definition
Audit Committees (independent directors, banking or financial expertise, not large bank customer, FDICIA 1991)
Sarbanes-Oxley Accounting Standards Act
Term
income statement components
Definition
Interest Income
- Interest Expense
= Net Interest Income
+Noninterest income
- Noninterest Expense
Provision for Loan Loss
Net Income Before Taxes
- Taxes
Net Income
Dividends
Retained earnings
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